New Rules To Equity Release

Equity release can be seen as one of the only ways to supplement your income when you approach or are in retirement. Equity release consists of entering into an agreement with a bank to take out a loan secured against your house. Unlike normal mortgages the bank then lets the interest accrue (roll up) rather than the householder pay it on a monthly basis. The loan is repaid to the bank once the homeowner dies and anything left is then passed onto the beneficiaries of the estate. Until recently equity release has only been available to the over sixty five. However this week a few lenders have drop the age at which you can apply for an equity release scheme. You can now enter into a equity release scheme from the age of fifty five, however the amount you can borrow will be much reduced. From last week two lenders are offering equity release to people aged from fifty five. The maximum advance however is reduced to 35% of the property's value at the start of the scheme. The lenders claim that they have reduced the term to help those who have retired early or those who wish to give their children a deposit for their first home. However as the lenders are now allowing the loan to be taken earlier this means that it will accrue even more interest payments so your debt will be bigger and what you leave in your estate worth less. The interest rates are not cheap either with rates above six and a half per cent being typical. The sums can be quite staggering. If you had a house worth £500,000 and you took a ten per cent loan of £50,000 at the age of fifty five. With interest of six and a half per cent this loan will have grown to £240,819 by the time you are eighty.

The lenders offer two types of equity release schemes. The first is the cash release or draw down scheme. This involves taking equity out of your home only when needed up to an agreed limit. This can save you interest on the money that you do not need at this stage . The second scheme is where you take the full lump sum from your house. How much you take out depends on your age. The younger you are the less you will get from providers of these schemes. And as we already know the younger you are the more you will pay in interest. It make you wonder therefore whether these schemes should be taken at a young age? As well as the interest rates the borrowers would also have valuation, legal and arrangement fees to consider.

In defence to these schemes they do offer negative equity guarantees. That means that if your house was worth less than your loan at the end of the term then the bank would not come after you for the difference.

Apart from the huge interest bill there are other downsides. First of all you would find it very hard to move house with an equity release scheme in place. This is because the house is mainly owned by the bank and you will find that your share of the equity has been reduced. Many advisors say that if you can afford it look at taking out a traditional mortgage rather than a equity release scheme. Many however would struggle to get a mortgage later in life. It may then be better to sell your house and downsize releasing equity that way. Or let your kids take a mortgage out on your house which you can both contribute to.

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